Are natural gas markets headed for panic? And is that a good thing or a bad thing?

(Author's note: As promised, this column returns to the three-part series on the outlook for natural gas markets following an interruption last week to update the latest developments with OPEC and oil prices.)

Should US natural gas markets start rehearsing for panic? No, not the kind of apprehension that precedes a price collapse, but the opposite-which can have its own negative fallout (along with the bottom-line boost), as oil companies are realizing today.

Some analysts have been darkly warning of a coming spike in natural gas prices this winter, expressing concerns over the low level of storage and the lag time in getting wellhead deliverability back up to where it belongs in order to meet expected spurts in demand as cold weather snaps arrive this winter.

Only this week, American Gas Association has warned that US consumers could face significantly higher natural gas prices this winter. Noting that spot gas prices have topped $4.50/Mcf in the past month and still hover near $4/Mcf, an AGA report says prices could go higher still in the near term as more supply is directed toward storage.

AGA rounded up the usual suspects: Low wellhead prices the past 2 years squeezed drilling for gas, and even a rebound in drilling won't bring enough supplies on line to affect consumers' gas bills this winter. But the association reassures that storage should not be that much of a problem even though inventory levels are much lower this year than at the same time a year ago. Storage is only a bit lower than the average for the past 5 years, says AGA, and "All indications are that they will be up to targeted volumes by the onset of the winter."

But cold-weather demand can change the picture, says AGA: "A return to normal weather [from the mild levels of the winter of 1999-2000], even if natural gas prices were unchanged from their relatively low levels last year, would increase consumers' heating bills. Consumers should expect significantly higher natural gas bills if the present increase in gas commodity prices combines with higher gas consumption due to colder [but normal] weather."

AGA's assurances notwithstanding, there has already been a surprise on the storage side. Injection rates for last week came in about 20 bcf below market expectations. Much of this was due to the surge in demand from the increased cooling load in the Southwest and South-central US. So injection rates are going to have to pick up a bit from current levels in order to reach the targeted comfort zone of 3 tcf by Nov. 1, maybe as much as 78 bcf/week vs. the 54 bcf of last week. Most analysts are projecting that storage will come in at 2.6-2.7 tcf.

That's getting closer to the danger level that Greenwich, Conn., analyst Charles Maxwell of Weeden & Co. was predicting last month. Given the increased gas-fired power demand cooling load and the strong US economy, a return to normal winter weather-which the last few winters decidedly have not been-storage is likely to come in below 2.5 tcf.

So what then? Maxwell sounded pretty apocalyptic last month: "In practical terms, unless the coming winter approaches the highly unusual, +13% warmer-than-usual season we have just passed through, US gas storage numbers are accumulating in a potentially disastrous pattern of insufficient gas to take this country through the full span of cold weather to April of 2001.

"There is the possibility that we will be forced to allocate gas supplies to private homes, government departments, and public institutions, to defense installations, and to schools, universities, hospitals, and so on."

Maxwell frets that such rationing would hit the US manufacturing sector especially hard, with the potential for some far-reaching damage to the economy. He sees this as a likely scenario unless some reversal in the US gas consumption trend of 3%/year growth is forthcoming.

Maxwell sees a five-stage process in the evolution of a market panic:

The decline in wellhead deliverability.

Markets and investors delaying too long in seeing the supply crunch, thus denying producers the opportunity to redress the problem in a timely way.

Media attention focused on industrial plant outages.

Governmental reaction, coming amid the politics of a tightly contested presidential election campaign; the likely result would be the Clinton administration ultimately acknowledging the problem and raising the possibility of gas allocations, further alarming industry.

Panic and overexposure, in mid-to-late fall, followed by the actual onset of cold weather. Early outages could come in late January, with the worst to come in February and March.

This kind of scenario leads Maxwell to speculate that natural gas prices could peak in February at $6-7/MMbtu.

And the aftermath? A higher price range for natural gas, application of new technology, increased drilling, more LNG terminals, and an increased push to bring Alaskan gas south.

Sounds like a boom to me.

And it certainly is worth remembering that the last Democratic president to preside over an energy crisis (remember "the moral equivalent of war"?) did not have a hand-picked successor who is the avowed No. 1 enemy of fossil fuels?

That earlier effort ushered in the boondoggles of synfuels and conservation-at-any-cost. Perhaps a couple of oil men in the White House might have a better approach.